Friday, December 12, 2008

Market Wizards or Wizards of Oz? Bernard Madoff, hedge funds, and loss of trust.

Market wizards, or Wizards of Oz?

Right now there is a discussion on CNBC about Bernard Madoff's fraud/ponzi scheme.
"Low volatility, with consistent growth of 8-10 percent every year, quick liquidity... Put it all in there!".

People with millions listed to the wizard and put most of their money in
Madoff's funds. And now the money is gone, and trust is lost.

Some of Madoff's clients:
Sterling Equities, owned by Fred Wilpon (NY Mets owner)
Benedict Hentsch (Swiss private bank)
Bramdean Alternatives (U.K. asset manager)
Fairfield Greenwich Group - Fairfield Sentry Ltd.(Hedge fund firm)
Kingate Management -Kingate Global Fund Ltd.
Fix Asset Management
Pioneer Alternative Investments- Primeo Select Fund
Union Bancaire
Optimal Investment Services SA
For more information, see "Factbox-Firms exposed to Madoff's alleged fraud"

Wizards of Oz = Hedge Fund Managers?

Kenneth C. Griffin, founder of the Citadel, has been called a hedge-fund wizard. According to an article in the NY Times (10/7/08), "Between 1998 and 2007, he handled investors an average annual return of 20 percent, more than three times that of Standard & Poor's 500-stock index."

An article in the Chicago Tribune (12/12/08), mentions that quite a few smart people work at the Citadel..."generous payouts helped Citadel recruit a stable of PhDs, market wizards and computer gurus who could engineer a recovery."

I guess things were too good to be true. According to CNBC, Citadel's funds are down about 50%, and the company will not allow investors to withdraw funds for several months.


Hedge Fund Wizards (Washington Post, 12/19/07)
Nearly one year ago, Dean P. Foster, a professor of Statistics at the Wharton School of Business, and H. Peyton Young, a professor of Economics at the University of Oxford, wrote this article. Here is a quote that foreshadowed the current crisis:

"Hedge funds are risky for another reason. It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists... Although individual hedge fund managers may drag their feet, it is actually in the industry's best interest to encourage greater regulation and transparency. Otherwise, a rising tide of failed funds could cause a collapse in investor confidence, putting both the good and the bad wizards out of business."

Top Broker Accused of $50 Billion Fraud (WSJ)

Fees, Even Returns and Auditor All Raised Flags (WSJ)

Fund Fraud Hits Big Names (WSJ)

Hedge Funds Mystify Markets, Regulators: Deeply Powerful, Largely Unchecked (David Cho, Washington Post, 7/4/2007)

Stockbroker Fraud Blog
(Attorneys: Shepherd, Smith & Edwards)

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